Libor Rate Rigging

...fiddling the numbers

Three former employees of Barclays bank have been found guilty of manipulating the Libor interest rate between 2005 and 2007.

Responding to the controversy of rate rigging, Zee Hussain, Partner and specialist in employment law, outlines how a cut-throat industry caused employees to commit negligent acts to try and get ahead.

What is Libor?

The London inter-bank offered rate (Libor) sets out the prices for financial products and is designed to manage the interest rates for short-term loans between inter-continental banks.

Used to set rates for financial deals worth up to $450 trillion, Libor trickles down to consumer services, as it helps to influence the price of other transactions and financial services.

Seen as a global standard of our current financial model, Libor is a measure of trust and reflects how much confidence banks have in each other – which in turn has an effect on stock prices and the state of the wider economy.

Libor works on a rule of averages, with various banks setting an interest rate they would be happy to lend at and an average of these interest rates sets Libor.

During the calculations banks suggest interest rates in 10 currencies, covering 15 different loan lengths, ranging from overnight loans to loans paid back over 12 months.

Co-ordinating rates

The first suggestion made to the public that banks may have been manipulating Libor was in 2008, when a report in the Wall Street Journal suggested foul play.

Since then stronger evidence has emerged that the rate was being manipulated for financial gain – as fixing the interest rate at a particular level could lead to large scale profits for traders.

Conversations between traders seemed to highlight a cartel culture within the financial industry, as transcripts of chats between rate submitters and traders highlighted that traders were requesting movement in Libor based on their upcoming transactions.

The three former Barclays employees charged recently are only the latest casualties in criminal proceedings, with others previously implicated facing up to 11-year prison sentences.

Commenting on the controversy, Zee says:

“In a time when trust in financial institutions is dwindling, continued Libor cases are only going to compound that mistrust.

“While it can seem like simple greed and a hunt for profit motivated these actions – and for some of the traders this is likely true – I think it’s important that we look at the wider industry and the competitive nature of the City before passing judgement.

“In cut-throat, results-driven industries employees can be pushed to the absolute limit, which inadvertently causes staff to look to get ahead in any way possible.

“While justice should be served to those guilty of breaking the law – as those who manipulated Libor undoubtedly did – there are lessons to be learned for employers that push their staff beyond breaking point.

“Employers should look at this incident and realise that while a competitive atmosphere in the workplace is a positive thing, going too far can lead to questionable practices and policies being ignored.”

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